New Tax Residency Tests - Proposed "Bright Line" and Factor Tests
In the 2021 Federal Budget, the Treasurer indicated that the current Australian tax residency rules would be replaced with a "new, modernised framework".
"The primary test will be a simple ‘bright line’ test — a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident. Individuals who do not meet the primary test will be subject to secondary tests that depend on a combination of physical presence and measurable, objective criteria. The measure will have effect from the first income year after the date of Royal Assent of the enabling legislation."
The new tax residency rules require enabling legislation and it would be impractical for them to come into effect until the beginning of a new tax year, suggesting that the earliest implementation date would be July 1, 2023. The lack of any comment regarding new residency rules in the October 2022 Federal Budget, and indeed the absence of commentary so far in 2023, also suggests that they are not currently considered a priority, leaving open the possibility of an even later date.
The likely delay means that there is still time for expatriate organisations, and Australian Chambers of Commerce tend to be the most influential vectors, to try and persuade the Labor Government to consider changes to the new rules, particularly with respect to Australians being potentially considered tax resident if they spend more than 45 days in Australia in a financial year.
On a positive note, Assistant Treasurer Stephen Jones reportedly told an Australian Chamber of Commerce event in Singapore in the week beginning August 22, 2022 that the new tax residency rules were in the Government's "in-tray" ahead of the October Budget and the 45 day limit was "being looked into". Although no mention of tax residency was included in the October budget there has at least been some attempt at communication and dialogue from the incoming Labor government, in very stark contrast to the previous LNP administration.
The new framework is to be based on recommendations made by the Board of Taxation in 2019 and it should be noted that in the Consultation document which preceded those recommendations referenced a number of guiding principles followed by the Board, including:
"Adhesive residency: it should be harder to cease residency than it is to establish it. Generally, once sufficient time is spent in Australia, and their connections are sufficiently embedded, then it is appropriate that this level of engagement with and benefit from Australian society must be scaled back to a large extent before residency ceases."
Consequently, apart from pursuing greater clarity, the Board specifically aimed to make it more difficult for individuals to break tax residency. From a Government perspective there is very little downside associated with this approach - with the tax net being cast wider, bringing in potentially greater revenue from individuals who often have no voting rights under current electoral rules. The Board of Taxation itself is dominated by Government and big four accounting firm representatives, and there is no "individual" taxpayer, or expatriate, representation.
Below we provide a summary of recommendations, as we understand them, but stress that except in extraordinary circumstances individuals should not seek to obtain professional advice before draft legislation is made available - there just continues to be too much uncertainty to make what are often fine judgements in relation to residency.
Summary – Likely New Tax Residency Rules
As mentioned above, the key feature of the Board of Taxation report is a focus on what is referred to as bright line ‘days count’ tests to provide clarity and simplicity. We discuss these below and have also prepared a flowchart which is available at the bottom of this page.
Incoming Tax Residents
For individuals who are currently non-resident for Australian tax purposes:
1. 183 day test
An individual who spends 183 days or more in Australia in an income year would be a tax resident for that income year, regardless of the person’s broader circumstances. If you haven't spent 183 days or more, move to the next test
2. 45 day test
Did you spend between 45-182 days in Australia during the financial year?
If you did not, then you are not resident for tax purposes, but if you did then proceed to the factor tests below. It is this "bright line" test that causes most consternation to expats and the prospect of being considered a tax resident by spending more than 45 days in Australia during a tax year - given that many will meet the "two or more" of the factor tests below.
3. Factor Tests
The Board indicated that the nature and composition of these factors should be determined in consultation, but the broad intention is that if you meet two of more of these factors, you are deemed as an Australian tax resident from the first day you arrive in Australia:
- Right to reside permanently in Australia: Are you an Australian Citizen or a permanent resident?
- Australian Accommodation: Do you have an arrangement at any time to stay in a property kept for your sole use?
- Australian Family: Do you have a spouse and/or children under the age of 18 in Australia?
- Australian Economic Interests: Do you have substantial Australian economic ties (such as employment or business interests)
Regardless of the precise approach adopted it should be appreciated that, consistent with current law, an individual's tax residency might be determined, not by the Australian domestic income tax laws, but also by the tie-breaker tests in a Double Tax Agreement (DTA). DTA's generally override the domestic law to the extent of any inconsistency. Hence a taxpayer in the UK, US and Singapore - countries with which Australia has a DTA - may benefit from tiebreaker tests, while for expatriates in countries such as Hong Kong or the Middle East, the "days of residency" tests may be critically important.
Just note however that relying upon tie-breaker provisions won't necessarily provide you with absolute clarity - and can give rise to more compliance costs.
Outgoing Tax Residents
Under the proposed new rules, a taxpayer only stops being an Australian tax resident if they meet one of three tests.
1. Do you meet the "overseas employment rule" - an individual taxpayer will cease Australian tax residency from the day of departure if they meet all the following factors:
- they have been residing in Australia for the three prior income years
- they are employed overseas with an employment period of over two years from commencement
- they have accommodation available in the place of employment for the entire employment period
- they will spend less than 45 days in Australia in each income year of the employment period.
2. Do you meet the ‘short-term residents’ rule - a ‘short-term resident’ is someone who has been a tax resident of Australia for less than three consecutive income years. To stop being a tax resident, a taxpayer would need to:
- spend less than 45 days in Australia in the income year; and
- satisfy fewer than two factors (i.e. one or none) of the ‘Factor Tests’ above.
The third proposed test applies to ‘long-term residents’. A ‘long-term resident’ is not a ‘short-term resident’. To stop being a tax resident, a long-term resident would need to spend less than 45 days in Australia in:
- the income year; and
- each of the two previous income years.
The effect of the last test is that residency is "adhesive", clinging to the individual who has been a long-term tax resident of Australia – consistent with the Board's objectives above but not necessarily on an equitable or fair basis.
The Board's 2019 report suggested that a move to new residency rule would be subject to, "grandfathering or other transitional arrangements that will require further consideration". These are going to be potentially very important for existing expats and we will need to wait on more details.
Flowchart - Proposed New Tax Residency Rules
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